The Russell 2000 (^RUT) is packed with potential breakout stocks, thanks to its focus on smaller companies with high growth potential. However, smaller size also means these businesses often lack the resilience and financial flexibility of large-cap firms, making careful selection crucial.
Navigating this part of the market can be tricky, which is why we built StockStory to help you separate the winners from the laggards. Keeping that in mind, here are three Russell 2000 stocks to avoid and better alternatives to consider.
Cracker Barrel (CBRL)
Market Cap: $1.23 billion
Known for its country-themed food and merchandise, Cracker Barrel (NASDAQ:CBRL) is a beloved American restaurant and retail chain that celebrates the warmth and charm of Southern hospitality.
Why Is CBRL Risky?
- Lagging same-store sales over the past two years suggest it might have to change its pricing and marketing strategy to stimulate demand
- Falling earnings per share over the last seven years has some investors worried as stock prices ultimately follow EPS over the long term
- 7× net-debt-to-EBITDA ratio shows it’s overleveraged and increases the probability of shareholder dilution if things turn unexpectedly
At $54.82 per share, Cracker Barrel trades at 72.7x forward P/E. To fully understand why you should be careful with CBRL, check out our full research report (it’s free).
Polaris (PII)
Market Cap: $3.67 billion
Founded in 1954, Polaris (NYSE:PII) designs and manufactures high-performance off-road vehicles, snowmobiles, and motorcycles.
Why Are We Out on PII?
- Sales stagnated over the last five years and signal the need for new growth strategies
- Poor free cash flow margin of 3.4% for the last two years limits its freedom to invest in growth initiatives, execute share buybacks, or pay dividends
- Waning returns on capital from an already weak starting point displays the inefficacy of management’s past and current investment decisions
Polaris is trading at $64.41 per share, or 23.6x forward P/E. If you’re considering PII for your portfolio, see our FREE research report to learn more.
Patterson-UTI (PTEN)
Market Cap: $4.65 billion
Operating 135 Tier-1 super-spec rigs that can handle the industry's most demanding drilling projects, Patterson-UTI (NASDAQ:PTEN) provides contract drilling rigs, hydraulic fracturing, and drill bits to oil and gas operators.
Why Does PTEN Fall Short?
- Gross margin of 29.9% reflects its high production costs and unfavorable asset base
- EBITDA margin failed to increase over the last five years, indicating the company couldn’t optimize its expenses
- Ability to fund investments or reward shareholders with increased buybacks or dividends is restricted by its weak free cash flow margin of 5.8% for the last five years
Patterson-UTI’s stock price of $12.19 implies a valuation ratio of 61x forward P/E. Read our free research report to see why you should think twice about including PTEN in your portfolio.
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